Reduce Hexaware Technologies Ltd For Target Rs.280.00 - Emkay

* Hexaware reported in line result with a topline growth of 1.4% qoq. Slight beat on earnings was negated by lower operating margin (down 150bps qoq versus estimate of 80bps drop), which led to in-line reported earnings.

* Management continues to remain confident about its focus on Digital business along with diligent execution in traditional business, which would help it to achieve industry leading growth. Added 17 new clients with net new TCV of US$180mn (up 17.6% yoy) in CY17.

* Management has guided for 10-12% growth in Revenue/EPS for CY18, as it believes most concerns on Top Client ramp-downs are behind and thus remains confident about its strategy/offerings around Automation, Cloudify trends and driving customer experience.

* We have marginally enhanced our growth/earnings estimates for CY18/CY19 by 1.5% but believe the current valuations of 17x CY19 earnings are high and not sustainable. Reiterate REDUCE rating on the stock with TP of Rs280, valued at 14x CY19 earnings.

Commentary confident on market share wins and client stability

Management has shared a confident outlook for CY18 with Revenue/EPS growth guidance range of 10-12%. The confidence on growth is driven by strong net new deal TCV signings trends – US$72mn for Q4CY17 (signed TCV of US$180mn in CY17). The company believes that its robust focus on the traditional business (winning market share in low focus clients of larger Indian peers) apart from emerging Digital opportunities would ensure strong growth performance in the coming quarters. It expects growth in CY18 to come in Q2/Q3, as Q1CY18 may have some minor impact of one large account roll-offs (still is a Top 5 client). However, it is confident that the revenue impact of the two troubled accounts is largely taken care of and the current key account portfolio looks healthy from demand perspective. The key theme for client engagement would be around 1) Automate everything, 2) Cloudify everything (confident about prospects for the next few years) and 3) improving customer experience. The company has also committed to return Rs8 per share to investors through Dividend/Buyback in CY18.

We believe that the commentary is realistic given the business traction and client stability. We believe that the OPM impact in Q4CY17 is one off (impacted by lower working days, increments to partial workforce, new deal transition costs) and would see earnings growth in line with volume growth. The company would witness 11%+ volume growth over CY17-19, but would not see any major gains in profit margin given its aggressive pricing stance (automation driven) in the traditional business. We maintain our REDUCE rating with TP of Rs280, valuing it at 14x FY19E earnings.

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